The ravages of inflation mean that a million pounds is much less in real terms than it once was. Still, lots of people investing in the stock market like the idea that if they are successful, they could ultimately become millionaires.
It is possible. Indeed, some people have even built their Stocks and Shares ISA to a seven-figure value.
So, what would it take?
Three key variables
There is a trio of factors that determine the answer. How much is invested, at what annual rate of growth, and for how long?
Say someone invests £500k and achieves an 8% compound annual growth rate. It will take them nine years to reach a £1m valuation.
Changing one of the variables affects the others.
For example, if the investment is £100k, not £500k, the timeline rises from nine to 29 years.
Each investor is different
I see an 8% compound annual gain as challenging but achievable over the long run if an investor focuses on buying quality shares without overpaying for them.
Different people take different approaches when thinking of a timeframe for their investments. I think of the stock market from a long-term perspective.
So, imagine the timeframe is 25 years and we stick with the 8% compound annual growth rate.
Investing £1,100 per month (less than £255 per week) ought to be enough to hit the £1m target on that timeframe.
Steady investing with an eye on costs
Drip-feeding money in regularly can be a helpful financial discipline.
The shares bought will be critical to determining the return, but it can also be affected by fees and costs eating into it.
So it is sensible to take time to compare different options for share-dealing accounts and Stocks and Shares ISAs.
Some investors may decide to use a Self-Invested Personal Pension (SIPP). Thanks to tax relief, that could potentially let them pay £1,100 per month into the SIPP without even needing to come up with that much cash themselves.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Looking for millionaire makers
I mentioned that choosing the right shares is important.
Last week I added to my existing holding in a company I feel looks deeply undervalued: US food maker Campbell’s (NASDAQ: CPB).
Although it has dropped the reference to soup in its corporate name, I see the soup business as having strong long-term potential thanks to the company’s brand and association with soup.
As the name suggests, the firm is also seeking to grow other businesses, such as cooking sauces and biscuits.
For now the results are mixed. Sales are falling and I see a risk that the company’s portfolio of processed foods could keep losing appeal as consumers become more health-conscious.
Still, I think the share price fall has been far overdone.
The longstanding company now sells for just 11 times earnings. It also has a fabulous yield of 7.5%.
Could that be cut? Yes – any dividend can.
But, promisingly, it is fully covered. Campbell’s is a highly cash generative business.
I see it as being in a rough patch, not structural decline. Twenty-five years from now, I expect the Campbell’s share price to be far above where it is today. Meanwhile, I am earning a 7.5% yield on my investment.
